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Plan Well, Retire Well

Saving and investing your money

The Sea Change in Retiree Health Benefits

It used to be that retirees from state and local government positions and union retirees could look forward to receiving generous health benefits in the form of subsidized health insurance premiums or fully covered health expenses in retirement. Those days seem to be moving into the past rather quickly. The mega-bankruptcy and restructuring of General Motors will likely see retirees losing significant health benefits as some previously covered services such as eye-care coverage and dental coverage are dropped and some co-pays get increased dramatically. At the same time the Medicare program may see out-of-pocket expenses increase for its participants, leading to a double-squeeze on the affected union retirees.

Similarly, state employees and state government retirees may face a similar sea change in their covered health benefits as retirees. States such as Illinois, California and West Virginia face budget gaps in the billions of dollars. Moreover, they confront significant gaps between the expected future cost of benefits promised by their pension systems and the assets controlled by the pension systems. While current state employees and retirees may retain their benefits, it is quite certain that future state employees face a distinct possibility of receiving less generous retirement health benefits.

What are some action points for the average person who is saving and investing for his or her retirement? First, as some auto union retirees will say, some agreements for retiree benefits can unravel if the finances of your organization fall apart catastrophically. Second, the broad economic and demographic forces behind the pressure to change retirement health benefits for these groups of employees are massive economic pressures, which are not likely to diminish soon. I expect that the trend towards more individual risk-bearing and responsibility for retirement saving and investing, at least in the employer–employee context, to continue. For many of us, this means we should redo a retirement income projection to take into account the possibility of higher than expected future health care costs. It may mean that a person should bump up his or her savings rate to be ready to address the possibility of higher health care costs in retirement.

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